Tobin Tax in times of crisis

Nov 09, 2011

9th November, 2011

India introduced the Securities Transaction Tax (STT) in 2004 amidst fierce opposition. The tax is applicable on purchase or sale of equity shares, derivatives, units of equity-oriented funds through a recognised stock exchange in India or the sale of a unit of an equity-oriented fund to a mutual fund. However, the government is now thinking of a roll-back citing reasons like STT has not helped in reducing volatility and that a withdrawal will help in increasing market turnover.

At the recent G-20 Summit, divergent voices could be heard over the move to introduce global financial transaction tax. Europe continues to mull over a financial transaction tax (FTT) or as it is called ’Tobin Tax’. A new bill called the Wall Street Trading and Speculators Tax Act proposing a 0.03 percent tax on certain financial transactions has been introduced in America. In Europe, Britain is opposed to the idea of a European FTT while France and Germany insist that it is the time to introduce it.

Tobin tax, so named as it was proposed by Professor James Tobin in 1972, was essentially envisaged as a measure to discourage speculative short term capital flows as each transaction will be charged at a nominal rate usually less than one percent. Tobin tax was originally defined as a tax on all spot conversions of one currency into another. This theory can also be traced to Keynes' proposal in 1936 calling for a transaction tax on dealings on Wall Street. He reasoned that excessive speculation increased volatility and, if left unchecked, speculators would become a dominant force in the market.

It will be interesting to watch as to how Europe resolves its issues and whether it manages to bring in the FTT and whether it is successful in forking out payback of bailout packages received by financial institutions during the recent global crisis.